Obama Finds Merkel a Tough Sell as Ally on Europe Response

President Barack Obama has spent much of his term trying to get Chancellor Angela Merkel in his corner, only to find the German leader won’t easily bend to U.S. will.

Five months before the presidential election, the stakes are rising. Obama, in advance of a G-20 summit and European Union crisis meetings, is urging Merkel to take actions aimed at forestalling a euro region financial meltdown that would threaten the U.S. — and his campaign.

“If Europe implodes, Obama probably won’t be re-elected,” Gary Smith, executive director of the American Academy, a research group in Berlin that promotes trans-Atlantic ties, said in an interview. Yet helping any U.S. president right now “wouldn’t be on Merkel’s radar screen. The divisions about what needs to be done are so fundamental and public.”

Illustrating the concern, Obama discussed the crisis in separate phone calls with Merkel and Italian Prime Minister Mario Monti on June 6. They agreed that it’s important “to strengthen the resilience of the eurozone and growth in Europe and globally,” the White House said in a statement.

Obama has joined European leaders who chafe at Merkel’s prescription of budget austerity. While Germany may back expanding EU job-creation projects, Merkel balks at proposals for greater deficit spending or underwriting the entire currency union’s debt with joint bonds, even as the turmoil risks driving Greece out of the euro and Spain to seek aid for its banks.

U.S. Vulnerability

The U.S. may be more vulnerable than Germany, which has bucked the crisis. German unemployment is at a two-decade low of 6.7 percent and the economic growth that helped the euro area avoid recession is lessening Merkel’s incentive to change tack as Germany heads toward its own election next year.

“A further negative shock from Europe has significantly more potential to have a negative impact on the U.S. than on Germany,” Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, said in an interview. “If we had 5 percent unemployment, there wouldn’t be much contagion to the U.S. If we had strong job growth, a balanced budget, this wouldn’t really matter much to investors.”

Federal Reserve Chairman Ben S. Bernanke said at a congressional hearing that Europe’s debt crisis “poses significant risks to the U.S. financial system and the economy.”

G-20 Meeting

The White House is keeping up the pressure as Obama, Merkel and other Group of 20 leaders prepare to meet at Los Cabos, Mexico, on June 18-19, nine days before the next EU crisis summit in Brussels.

“We’ve noted a sense of urgency in Europe among European leaders, and we hope that urgency will lead to expedited action in the coming days and weeks,” White House spokesman Jay Carney said yesterday.

That means Merkel most of all. The leader of Europe’s largest economy says that the 17 euro nations now have the crisis-fighting tools and financial firewalls they need. Fixing their debt, growth and competitiveness gaps will take years, she said.

“No substantial changes in policy can happen without Germany,” said Nigel Gault, an economist at IHS Global Insight in Lexington, Mass. “Germany is the European paymaster.”

On the campaign trail, Obama is citing Europe as a drag on the U.S. recovery. After the U.S. Labor Department said on June 1 that payrolls expanded by only 69,000 last month and the unemployment rate rose to 8.2 percent from 8.1 percent, he said European leaders haven’t done enough to dispel “the cloud that’s hanging over from the Atlantic.”

Wide Impact

“What happens in Greece has an impact here in the United States,” he said in a May 21 news conference. “Businesses are more hesitant to invest if they see a lot of uncertainty looming across the Atlantic because they’re not sure whether that’s going to mean a further global slowdown.”

The U.S. economy grew at a 1.9 percent annual rate from January through March, down from a 2.2 percent prior estimate, the Commerce Department said on May 31. U.S. stocks last month declined the most since September as Europe’s debt crisis worsened. The Standard & Poor’s 500 Index pared gains after Bernanke’s remarks. The index closed down less than 0.1 percent to 1,314.99 at 4 p.m. in New York. The yield on the 10-year Treasury note lost two basis points to 1.64 percent.

The euro declined 0.8 percent to $1.2463 at 11:13 a.m. Berlin time after German exports fell in April and Italian industrial production shrank, underscoring the impact of the crisis on the euro area’s core.

Early Relationship

Even before Obama was elected, Merkel signaled she would push back when she disagreed. In July 2008, Obama wanted to hold a speech at Berlin’s Brandenburg Gate. Merkel rejected the spot as presumptuous for a U.S. candidate and Obama relocated to the Victory Column, two kilometers (1.2 miles) away.

Since taking office, Obama has feted Merkel with a state dinner at the White House and awarded her the Presidential Medal of Freedom. Over the last year, Obama and Merkel have talked at least a dozen times by telephone and in two video conferences, according to the White House.

Obama’s comments during her visit last June echoed the prodding by U.S. officials such as Treasury Secretary Timothy F. Geithner for Merkel to put up more money more quickly.

Europe’s financial situation “cannot be allowed to put the global economic recovery at risk,” Obama said at the time. “America’s economic growth depends on a sensible resolution.”

High Stakes

Last week, Lael Brainard, the Treasury Department’s top international envoy, visited Greece, Germany, Spain and France to discuss Europe’s crisis response. The U.S. has “tremendous stakes in Europe succeeding,” she said back in Washington on June 5.

All the pressure may backfire with Merkel, 57, the former physicist who dreamed of traveling in the U.S. when she lived under communism in former East Germany and now has to balance Germans’ bailout fatigue with her goal of preserving the euro.

“The Merkel government is really getting sick of all the complaining and lecturing from the Obama administration,” Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said by phone. “It’s really infuriating for them to hear someone like Geithner lecturing Europe on what it has to do given all the U.S. problems like the debt and the deficit.”

ECB Pushback

European Central Bank President Mario Draghi also pushed back. While parts of the crisis “unavoidably affect” the rest of the world, “I don’t think we should carry this reasoning too far,” he told reporters in Frankfurt on June 6, citing the U.S. economy as an example. All countries “have to address their own problems,” he said.

The U.S. adminstration’s pressure on Germany is unwise and shows a lack of knowledge about the roots of the crisis, Glenn Hubbard, an economic adviser to Republican presidential candidate Mitt Romney, was quoted as saying in the Dusseldorf, Germany-based Handelsblatt newspaper today.

Aiming to line up allies, Obama, 50, on May 30 held a videoconference on the crisis with Merkel, Monti and French President Francois Hollande, both advocates of debt-sharing in the euro area. Obama and U.K. Prime Minister David Cameron “agreed on the need for an immediate plan to tackle the crisis” during a call on June 5, according to White House statements.

The German leader didn’t take the bait during a town hall-style event with Cameron in Berlin. People “must be patient” and not expect the euro crisis to be resolved overnight, she said.

“Merkel thinks she knows how to resolve this and believes that what’s good for curing the euro debt crisis will also be good for the U.S.,” Jan Techau, director of the European Center of the Carnegie Endowment for International Peace in Brussels, said in an interview. “Merkel’s considerations for the euro crisis are very independent of the U.S. and U.S. elections.”